Real sector must drive financial sector: Subbarao

FINANCIAL REGULATION

General Manager of Bank for International Settlements Jaime Caruana (left) and RBI Governor D.Subbarao at the CAFRAL-BIS conference in Mumbai on Tuesday

It is the real sector that must drive the financial sector, not the other way round, said Dr D. Subbarao, Governor, Reserve Bank of India. He was delivering the inaugural address at the first CAFRAL-BIS (Centre for Advanced Financial Research and Learning and Bank for International Settlements) international conference on ‘Financial Sector Regulation for Growth, Equity and Stability in the Post Crisis World’ at Mumbai.  He pointed out that while historical experience may tempt one to believe that financial sector development aids growth and, therefore, more of it must be better, the actual experience was different. He said the financial sector had kept growing out of alignment with the real world.  Citing the example of the US, he said that over the last 50 years, the share of value added from manufacturing in GDP shrank by more than half from around 25 per cent to 12 per cent while the share of financial sector more than doubled from 3.7 per cent to 8.4 per cent.  The same trend is reflected in profits too. In the same period, the share of manufacturing sector profits in total profits declined by more than two-thirds from 49 per cent to 15 per cent while the share of profits of the financial sector more than doubled from 17 per cent to 35 per cent. The large share of the financial sector in profits, when its share of activity was so much lower, tells a compelling story about the misalignment of the real and financial sectors, he said.  Dr Subbarao also talked about the role of regulation in achieving equity.  He said, "Our experience in India has been that left to itself, the financial sector does not have a pro-equity bias." He outlined the steps taken by the RBI to promote 'socially optimal business behaviour', including priority sector lending, lead bank scheme, licensing of branches, as well as its pursuit of financial inclusion. He said, "The extent of financial exclusion is staggering. Out of the 600,000 habitations in India, less than 30,000 have a commercial bank branch. Just about 40 per cent of the population across the country have bank accounts, and this ratio is much lower in the north-east of the country."  Admitting that these statistics, even though distressing, do not convey the true extent of financial exclusion, he said even when accounts were claimed to have been opened, they were often dormant.  Mr Jaime Caruana, General Manager, Bank for International Settlements, said sovereigns must earn back their reputation as risk free borrowers, since they act as the ultimate backstop facility. This was very important for the conduct of monetary policy. He also urged countries to build up fiscal buffers during good times. 

HBL

Welfare schemes could bleed exchequer, warns former RBI Governor Y Venugopal Reddy

MUMBAI: India's fiscal woes could deepen because of welfare schemes such as the National Rural Employment Guarantee Scheme, former governor of the Reserve Bank of India, Yaga Venugopal Reddy, said on Tuesday.  Reddy, whose conservative stewardship of the central bank between 2003 and 2008 is widely credited with shielding India's banking system from the worst of the global financial crisis, said schemes such as NREGS, the flagship welfare scheme of the United Progressive Alliance government, were almost impossible to withdraw, potentially exacerbating the fiscal situation. The scheme, which commits the state to provide employment for a minimum of 100 days a year to rural workers, has been criticised by many economists for its failure to create assets on the ground but appears to have paid rich political dividends for the government. It has been also hailed for reducing migration from rural areas, providing an economic stimulus by boosting consumption and raising wages for those at the bottom of the pyramid in both rural and urban areas. But Reddy said India entered the downturn in a frail fiscal state, leaving it in a weaker position to raise spending.  "In India, there are three problems: One, we started with a relatively weak fiscal situation. Second, we viewed programmes such as NREGS and rural pay as a stimulus whereas actually they are not easily withdrawable, and third, the revenue component was more than the capital component in the expenditure. All these put together have resulted in some sort of a fiscal problem," the former governor said. India's fiscal deficit is expected to widen to close to 5% of national income in the year ending March 31, 2012, compared with a projection of 4.6% in this year's budget because a slowing economy has had an adverse impact on revenue collection while the government has been unable to rein in spending.

INDIA MUST JOIN EU BAILOUT

Reddy, who now lives in Hyderabad, says that policymakers need to do some "honest introspection" about the fiscal situation. "In the name of fiscal stimulus, we should not try to simply reduce expenditure. In fact, you should raise revenue and you should be able to identify where revenue enhancement is possible," he said. With inflation still close to double digits, Reddy, who is this year's winner of the Lifetime Achievement Award at The Economic Times Awards for Corporate Excellence, said the central bank would hardly be in a position to pause, let alone consider cutting interest rates. Reddy, who supervised Indian banks as a central banker for over eights years in the RBI, including a stint as deputy governor, said there are "significant elements of truth" in the analysis of ratings agencies Moody's and Standard & Poor's. Reddy said the "negative conclusion" by Moody's, which had recently revised its outlook on Indian banks to 'negative', was not warranted, but advised banks and the government to treat the analysis as a "good warning". The finance ministry and Indian banks have trashed the change in outlook. 

Reddy strongly favoured India supporting the Euro zone by funding the European Stability Fund - a view already expressed by the government. "India is an important country and has to demonstrate its interest in ensuring the Euro zone succeeds."

ET

‘Banks must innovate to serve customers better'

Kochi : IDRBT (Institute of Development and Research in Banking Technology), the technical arm of RBI, in association with South Indian Bank, conducted an Executive Round Table named ‘Beyond Core Banking' at South Indian Bank's Administrative Building near here. Delivering the keynote address, Mr G. Padmanabhan, Executive Director, RBI, said since majority of the banks in India have implemented core banking, it is high time that banks innovate and introduce more technology products and services to serve customers. Mr R. Sambamurthy, Director, IDRBT, stressed the need for building up management information system in banks which will help understand the clients better and to meet their requirements in full.  Dr V. A. Joseph, Managing Director and CEO, South Indian Bank, welcomed the gathering. Ms Suma Varma Regional Director, RBI, Thiruvananthapuram, Mr Abraham Thariyan, Executive Director, South Indian Bank, spoke on the occasion.

HBL

India would be impacted by newer regulations : Subbarao

Mumbai, Nov 15 : Flagging the issue of cost of regulations, Reserve Bank Governor D Subbarao today said that emerging economies like India would be impacted by newer regulations currently under discussion globally. "What concerns us is that these global standards are going to be applied uniformly but their implications for emerging market economies will be different given the different stages of our financial sector development," Subbarao said here. Speaking at the inauguration of a global seminar organised by RBI's research and learning body CAFRAL and the Bureau of International Settlements, Subbarao said the financial sector in the country is still under development. Following the recession of 2008-09, a slew of norms have been either suggested or are in the process of being made to ensure financial stability like the Financial Stability Board and the Basel Committee on Banking Supervision (BCBS). One of BCBS' suggestions--the Basel-III norms calling for additional capital adequacy of banks--is one of the most debated issues at present. Subbarao cited studies done by multiple bodies which talk of affecting growth following implementation of Basel-III and said, the country will also get affected by it even though a majority of banks have healthy capital buffers. With high growth, credit demand is going to be healthy in the days ahead and banks will have to expand their balance sheets which will in turn require them to raise capital, Subbarao explained. "The concern is that this will raise the cost of credit and hence militate against growth," he observed. "The crisis brewed in the advanced economies and much of the post-crisis reforms are driven by the need to fix what went wrong there...the agenda under consideration has been dominated by advance economy concerns," he said. Subbarao also stressed the need to focus on the real sector saying the financial sector cannot reach out to those at the bottom of the pyramid.

IBN Live

FT-YES BANK International Banking Summit attracts global banks

... “Indian financial sector has gone through significant transformation and global integration, under the able guidance of RBI. The second generation reforms, including the recent deregulation of the savings rate, opening of banking licenses, etc. are game changers and will facilitate the shift from lazy banking to dynamic banking,”....

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RBI to bring about big changes in deposit cover

The Reserve Bank of India (RBI) is advocating sweeping changes in the deposit insurance system. The initiative would protect the interests of small depositors who have accounts in private banks and small, urban cooperative banks. The changes sought include the power to dissolve a bank before insolvency, an increase in coverage limit and access to depositors’ database. Deposit insurance systems help in arresting panic reactions and hasty withdrawals that arise when banks are believed to be reeling under financial troubles. They help protect the impact of financial crises and restore the public confidence in the banking system. The Deposit Insurance and Credit Guarantee Corporation (DICGC), set up in 1962, is the deposit insurance system and is a fully owned subsidiary of Reserve Bank of India. The recent global financial crisis has rekindled the interest in deposit insurance and in a country like India, deposit insurance is critical for financial inclusion and to protect small depositors from strategic errors by management and wider systemic shocks, said K.C.Chakrabarty, Deputy Governor of Reserve Bank of India, on Tuesday. However, awareness about deposit insurance facility is low because banks in India are perceived to be either ‘too big to fail’ or cannot fail on account of government or Reserve Bank of India backing, he said. “While this may be true for the public sector banks, it certainly does not hold good in the case of private sector banks, foreign banks operating in India and the large number of cooperative banks,” he said. Speaking at the ‘International Conference on Role of Deposit Insurance in Banking Resolution Framework’, he said that, although, DICGC was compliant in its role as a pay-box system relating to the settlement of claims as per rules, there was weakness in the overall bank insolvency framework that needs to be addressed. “It is necessary to broaden the mandate of DICGC from pay-box to attending all aspects of bank resolution, including the monitoring of banks, prompt corrective action and implementing the least-cost method of resolution of troubled banks. This would lead to faster settlement to depositors, lower costs and stability of the financial system,” Chakrabarty said. He also asked for powers for Reserve Bank of India to dissolve a bank before insolvency and a special bank resolution legislation for expanding resolution powers. To provide quick access of funds to depositors of failed banks, all urban cooperative banks should be asked to implement core banking solutions (CBS) and an effective interface between DICGC and banks’ CBS needs to be created to access depositors’ databases. Reserve Bank of India had also set up a working group on reforms in deposit insurance, including amendments to the DICGC Act, he added.

FC 

See no systemic weakness in Indian banks: RBI's Gokarn

RBI Deputy Governor Subir Gokarn is not worried about the state of Indian banking system. He believes there is no systemic weakness in India banks, even though non-performing assets are rising due to the gloomy economic environment. The system, as whole, is secured stated Gokarn reacting to the recent downgrade of the Indian banking system by global agency Moody's. "I cannot make a judgement on what a rating agency does. I can neither endorse their views nor I can challenge. Every six months, we come out with financial stability. In that exercise, there is great deal of stress testing," he told reporters on the sidelines of a conference held here in Mumbai.  Last week, Moody's lowered its outlook for the Indian banking system from 'stable' to 'negative' on concerns of a possible rise in bad loans, capital infusions and profitability. "We are not targeting any specific rate. We intervene only when there is very strong volatility in a particular direction. It (currency volatility) is now happening globally," the Deputy Governor said.Meanwhile, bankers rubbished some industry rumours suggesting that the finance ministry has asked state-owned banks not to get ratings from ICRA, an associate rating agency of Moody's operating in India. "We have not received any instruction from the finance ministry in this respect. The ministry normally does not pass on this type of intimation," M V Nair, CMD, Union Bank of India told Moneycontrol.com.

RBI Governor D Subbarao on Occupy Wall Street: Growth sans equity destabilising

MUMBAI: Reserve Bank Governor D.Subbarao today said that the key message from the " Occupy Wall Street" movement is that growth itself can be destabilising if not accompanied by equity. "Growth itself can be destabilising if it has no equity dimension...the elite cannot go on to do obscenely well even as the rest keep moving backwards," Subbarao said speaking to an audience comprising of bankers from across the globe at a seminar here. The 'occupy' protests, despite their "amorphous nature and refusal to formulate a set of demands" have been able to strike a chord and spread the world over just because of that, he observed. Interestingly, Subbarao's remarks come on a day when New York police raided the Zuccotti park, the ground zero for the anti-Wall Street protests, ordering protesters to leave the area or court arrest. The movement which began at Zuccotti park in New York's Manhattan area in mid-September caught the attention of the rest of the world, particularly in the West which is reeling under an extended period of financial turbulences.  India had become the 83rd country internationally and Mumbai the 1501st city the world over, to witness the wave when a small group of people held protests at the Dalal Street earlier this month. However, the protestors were not able to strike a chord.  

ET

Bank locker turns deadly gas chamber for guards in Kolkata

......However, Cossipore police say that this one did not have a buzzer and they had no clue there was any such currency chest in the area. But the bank issued a statement saying they had adhered to all rules and regulations. Currency chests are essentially RBI cash storage units run by banks under RBI's inspection. This one catered to ING Vysa's 12 branches in Kolkata and Howrah..............

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Gokarn hints at change in RBI’s policy stance

RBI Deputy Governor Subir Gokarn hinted at little change in RBI’s stance in light of gloomy IIP data and inflation figures that remain stubbornly high. Gokarn said the central bank would keep watch on whether the output data, which showed a slowing economy, were later reflected in prices growing more slowly. The bank’s moves were based on a decelerating economy. He told reporters: “The IIP figure does have an impact on the projection for the year as a whole but the stance that we had taken was itself premised on deceleration. So this number doesn’t change that stance.” “How it plays out later on, particularly on the dynamics of inflation, clearly will influence beyond the quarter,” he added.  Trouble in the euro zone is unlikely to affect the RBI’s day-to-day monitoring of short-term interest rates, Gokarn said.

IE

The NR EYE: Banks innovate as RBI deregulates deposit rates

Non-resident Indians (NRIs), particularly those with families back home, have some more reasons now to remit more money. The latest one was given by India’s central bank, the Reserve Bank of India (RBI), when it freed the interest rates that banks could offer their clients on savings accounts. In an earlier move, the apex bank had hiked interest levels to make even the non-resident bank accounts more lucrative. On their own too, several public and private sector banks in India have been innovating beneficial products and schemes for overseas clients. In a move late last month, RBI threw out the last vestige of the regulated interest rate regime. Now, the rates applicable to only NRI deposits are regulated but that is also likely to go as and when India adopts capital account convertibility. In a notification, the central bank said banks were now “free to determine their savings bank deposit rate” with immediate effect. Within hours the private sector Yes Bank hiked its savings bank account interest rate by two percent. Soon, it was Kotak Mahindra Bank ltd., and others are expected to follow suit as competition to woo savings bank depositors hots up. Savings account rates have traditionally been very low and have never matched up to the high rates of inflation. It would actually mean that keeping money in a savings account was a loss-making proposition. Yet, we must understand that most people have been keeping large sums in savings accounts simply for mthe reason that their salaries are credited to such accounts and most have lacked the knowledge and skills to quickly deploy it to other more fruitful investment options. The savings account rate remained static at 3.5 percent for more than eight years before it was hiked by 0.5 percent in April this year. Now some banks are offering up to six percent on such deposits. Until 2010, the average cost for banks for such accounts was at around 2.8 percent because they used to pay interest only on the minimum balance kept between the 10th and the end of a month. From April, they have been paying interest rate on a daily average basis. Regulations of deposit rates were first enforced in September 1964. In September 1969, RBI banned interest payment on current accounts and deposits of up to 14 days. From 1979 onwards, almost all deposit rates were administered. In April 1992, banks were allowed to fix interest rates on term deposits of 46 days to three years and more within the ceiling prescribed by RBI. In October 1995, banks were given the freedom to fix rates on domestic term deposits over two years. It was only in October 1997 that interest rates on term deposits were totally deregulated. A year later, the minimum maturity of term deposits was reduced from 30 days to 15 days and it dropped further to seven days in 2002, only for wholesale deposits of at least `1.5 m. Now even retail customers can keep any amount for seven days. Meanwhile, public sector lender Indian Bank has revised its Foreign Currency Non-Resident and Non-Resident (External) deposits interest rates. For FCNR(B) deposits, in USD terms, the revised interest rates has been fixed at 1.94 percent as against 1.86 percent for deposits of one year and above but less than two years. For deposits of two years and above but less than three years, it has been revised to 1.61 percent from 1.56 percent during the same period of previous year. The rates for deposits of three years and above but less than four years has been hiked to 1.77 percent from the existing 1.72 percent. For deposits of four years and above but less than five years has been fixed to 2.05 percent from the existing 1.98 percent. For deposits of five years only, the interest rates has been hiked to 2.37 percent as against existing 2.24 percent. For NR(E) term deposits, the revised interest rates has been fixed at 2.69 percent for one year and above but less than two years (2.61 percent existing). For two years and above but less than three years it has been fixed at 2.36 percent from 2.31 percent. The bank said that for deposits of three years and above and up to five years the rate has been fixed to 2.52 percent. On its part, the Kerala-based old-generation private lender, Federal Bank, has started accepting FCNR deposits in three more currencies and also hiked the interest rates on non-resident term deposits. FCNR deposits in the US dollar will get 1.94 percent to 2.69 percent in select maturities. The State Bank of Hyderabad has launched a new product which will give double benefit to customers. A customer who deposits, say `1,000, in this scheme will see it double in just 87 months. The yields achieved are 13.84 percent (general customers) and 14.56 percent (senior citizens) respectively. There will be no premature penalty if the customer withdraws the deposit after 60 months, in addition to the higher rate of interest. The product would be available to all resident.

http://www.thepeninsulaqatar.com/india/172544-the-nr-eye-banks-innovate-as-rbi-deregulates-deposit-rates.html

RBI forex check only if rupee very volatile

The Reserve Bank of India on Tuesday said it would not be changing stance on the policy of exchange rate management. Which is, it maintained, no intervening to help a falling rupee till it saw extreme volatility. “Our approach to the rupee is that we are not targeting any specific rate. We intervene when there is extreme volatility. The objective is only to smoothen that volatility,” said Subir Gokarn, deputy governor. He was clear on there being no coming to the rescue for traders who hadn’t hedged their risks. RBI had intervened in the foreign exchange market in September. The rupee closed at 50.67 to the dollar on Tuesday, as compared to 50.29 yesterday. Also, with successive devolvement of government securities and benchmark yields around nine per cent, RBI says it will concern itself with maintaining adequate liquidity in the economy. "RBI does not target yields; our objective is to manage liquidity," said Gokarn. If the underlying driver of high bond yields or any kind of distortion is liquidity, then the solution is to address the latter issue, Gokarn added. Adding: “Borrowing (by banks) through the LAF (Liquidity Adjustment Facility) has been above the one per cent benchmark and government cash balances have been negative. We will be watching these patterns closely, to know if they are temporary or likely to persist.” Responding to criticism on the ineffectiveness of successive rate rises on monetary transmission, he said transmission was reasonably effective when liquidity was in deficit and even though banks may say they are not going to pass it on, the data shows otherwise. "Banks may not change base rates but they will certainly negotiate on spreads or they may turn down the requests. Either way, the transmission is being achieved," said Gokarn. A majority of banks have kept their base rates unchanged despite consecutive rate increases of 25 basis points each.

BS

Bank employees threaten strike

The All India Bank Employees’ Association has threatened a strike if banks proceeded with a bailout proposal for cash-trapped Kingfisher Airline. The association also alleged banks had bought the airlines’ shares for 260 per cent more than market prices, and that there had been over-valuation to accommodate the airline. The body has demanded a parliamentary probe into the purchase of shares. Any bailout of the airlines by banks or the government would be anti-national, said the association’s general secretary, H Venkatachalam.

BS

Panel reports on banking, insurance Bills may be delayed

...One of the key provisions of the Bill proposes to confer power upon the RBI to call for information and returns from the associate enterprises of banking companies and inspect the same, if necessary. The RBI has indicated that without such a power, it would not be possible to issue new banking licences.....

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Must make audit reports of coop banks public: CIC to RBI

...“The best check on arbitrariness, mistakes and corruption is transparency, which allows thousands of citizens to act as monitors of public interest....

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Trim your costs, not your sails

This is not the first time that the Reserve Bank of India (RBI) Governor Duvvuri Subbarao has suggested that banks trim loan rates while offering more to their customers; at a Bancon conference in early 2010, the government had recommended much the same thing. In the central bank’s latest review of the banking industry, Subbarao says banks need to further push up operating efficiencies by optimising costs such as wages and salaries, transaction costs and provisioning. The Governor believes this would allow them to lower lending rates but not lose out on profitability..........

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